(Updates prices; adds comment, details)
* Spain signals distress over rising borrowing costs
* G7 agrees to work together to deal with debt crisis
* U.S. services sector's growth picks up modestly in May
By Wanfeng Zhou
NEW YORK, June 5 (Reuters) - The euro fell and German bond prices gained on Tuesday as the euro zone's debt crisis showed signs of escalating after Spain said it was being shut out of credit markets.
The treasury minister of Spain, the euro zone's fourth-largest economy, said high borrowing costs meant credit markets were closing to his country, and he made an appeal to the European Union to help Madrid recapitalize its debt-laden banks.
Finance ministers from the Group of Seven major economies discussed progress toward financial and fiscal union in Europe after an emergency call but made no joint statement.
World stocks advanced, with the major U.S. stock indexes bolstered by data showing the U.S. services sector grew at a slightly faster pace in May as new orders improved.
In Europe, shares advanced in a nervous, choppy session as investors bought beaten-down shares on hopes for global central bank policy action to revive the economic recovery.
"None of these meetings have produced anything meaningful, and with debt burdens piling up across the globe, I remain highly doubtful that anything substantive will be implemented, and anything that falls short of fiscal union in Europe will allow the crisis to proliferate," said Christopher Vecchio, currency analyst at DailyFX in New York.
The MSCI world equity index rose 0.6 percent to 292.79 points.
On Wall Street, stocks staged a modest advance after earlier skating around the break-even point. The Dow Jones industrial average added 28.72 points, or 0.24 percent, to 12,130.18. The Standard & Poor's 500 Index rose 6.81 points, or 0.53 percent, to 1,284.99. The Nasdaq Composite Index gained 19.06 points, or 0.69 percent, to 2,779.07.
"Europe's obviously a concern, but we've been selling off for weeks on that," said Peter Boockvar, equity strategist at Miller Tabak & Co. in New York. "A slightly better-than-expected services number, which makes up the majority of the U.S. economy, is a sigh of relief in the face of a lot of bearishness."
The euro zone's blue-chip Euro STOXX 50 index closed up 0.4 percent, with volumes thinned by a second day of UK public holidays.
After Tuesday's G7 finance ministers' conference call, investors are waiting for a European Central Bank policy meeting on Wednesday, Federal Reserve Chairman Ben Bernanke's testimony before the U.S. congressional Joint Economic Committee on Thursday, and the Greek elections and G20 meeting in Mexico, which are both on the weekend of June 17.
Funding options are narrowing for companies across the globe, as issuers are shut out of markets due to risk aversion for weaker credits and demand for spread that is driving costs sharply higher.
EURO ZONE IN DECLINE
The euro, which early in the day hit a one-week high of $1.2542, fell 0.4 percent to $1.2440.
The risk premium that investors demand to hold Spanish 10-year debt rather than safe-haven German bonds hit a euro-era high of 548 basis points on Friday on concerns that Spain will eventually be forced to seek a Greek-style bailout.
Spain will test the market on Thursday by issuing between 1 billion euros ($1.24 billion) and 2 billion euros in medium- and long-term bonds at auction.
Adding to the bearish sentiment, all of the euro zone's major economies are now in various states of decline, according to business surveys that heaped more pressure on Europe's leaders to stop the region from becoming the center of a new global crisis.
The dollar rose 0.5 percent to 78.74 yen, hitting a session high after Japan's finance minister, Jun Azumi, said a strong yen is damaging Japan's economy.
The price of Brent July crude seesawed and last slipped 18 cents to $98.67 a barrel, coming back from a 16-month low of $95.63 on Monday. U.S. July crude gained 31 cents to settle at $84.29 a barrel.
Spot gold eased to $1,616 an ounce.
The benchmark 10-year U.S. Treasury note shed 6/32 in price with the yield at 1.551 percent as traders booked profits on a rally that pushed yields to historic lows. The benchmark 10-year note's yield touched an all-time low of 1.44 percent on Friday.
"Treasuries had rallied so much over the last week and last month that we are just seeing some of that taken back yesterday and today," said Eric Stein, vice president and portfolio manager at Eaton Vance Investment Managers in Boston. (Additional reporting by Rodrigo Campos and Ellen Freilich with Shankar Ramakrishnan from IFR; Editing by Jan Paschal)